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Restructurings Could Improve
Transparency in South Korea

By

Kimberly SongStaff Reporter of The Wall Street Journal

Updated Aug. 25, 2003 12:01 a.m. ET

The South Korean corporate sector might have finally hit upon on a feasible way to improve its lackluster corporate governance and transparency. The plan: Tidy up the complex web of cross-shareholdings among the country's sprawling conglomerates, or chaebols, into neat and orderly holding companies.

The intricate business and financial relationships between affiliate companies that helped make Korea's chaebols powerful are now proving problematic. Outsiders have a hard time understanding the true ownership structure or state of finances of the companies. These tangled relationships have contributed to the "Korea discount" that keeps Korean equities trading more cheaply than other markets in the region. The Korea Stock Price Composite Index, or Kospi, trades at an average price-to-book multiple of about one, while the Taiwan Stock Exchange trades at about 1.5. The price-to-book ratio compares the share price with the actual cost of the company's assets, minus depreciation.

In the past, it took the government to bring change to the chaebols. Following the Asian financial crisis, a government-led campaign to overhaul big business in Korea saw the dissolution of the Daewoo group after it went bankrupt in 1999, and the split-up of the Hyundai Group into three smaller groups in 2000.

These days, attempts at reform are coming from the conglomerates themselves. So far this year, five conglomerates, including one of the country's largest, LG Group, have restructured themselves into holding companies to simplify their ownership arrangements and increase shareholder value for both majority and minority holders. The other reformers are electronic-parts maker Daewoo Telecom, Dongwon Financial Holding, ramen-noodle maker Nongshim Holdings and natural-foods packager Pulmuone. Since legislation was passed three years ago, paving the way for holding companies, a total of 19 have been formed. Analysts and executives say that some of these early successes could build momentum for other conglomerates to follow.

"After LG group's restructuring, yes, more companies are thinking about whether the holding company makes sense for them, too," says David Kim, chairman and chief executive officer of Daesung Group, a Seoul global-energy concern. Daesung, says Mr. Kim, also is evaluating various restructuring strategies, including the holding-company model.

"It clears up the clutter," says Henry M. Seggerman, president of International Investment Advisers, a Korea-focused investment-management company in New York. "It lessens the value-destroying impact of diversification by dramatically reducing company holdings in completely unrelated businesses."

The LG Group's much-heralded transformation took five years to complete, during which the group merged 16 of its affiliates into other group companies, sold five others and listed eight more on the Korea Stock Exchange and Kosdaq. Today, 34 of LG's 51 affiliates, excluding financial businesses, operate under a holding company called LG Corp.

The new holding company will manage group-level investment decisions, which should free up affiliates to concentrate on their individual businesses. Investors appear to approve. Group companies such as LG Electronics and LG Chemical have seen their stocks rise 45% and 30%, respectively, since the announcement of the new structure in March.

But not all chaebols can follow LG's lead. The country's largest conglomerate, Samsung Group, would find it too expensive to meet regulations that require a holding company to own at least 30% of listed affiliates. For Samsung Electronics alone, the Lee family, which directly and indirectly controls about 22% of the company's shares, would have to purchase 8% more from the market. This would cost as much as 5.38 trillion won ($4.61 billion), says Steven Lee, publisher of Equitable, a Seoul financial magazine. Other rules could also be costly to adhere to. They require the holding company to hold 50% of unlisted affiliates and to maintain a debt-to-equity ratio below 100%.

"Even though some big companies cannot go [into a holding company structure], many middle-size and small conglomerates are considering it now," says Choi Jungkiu, director of McKinsey & Co. in Seoul. "In order to attract foreign capital for continued growth, conglomerates realize the importance of transparency."

Pulmuone, one of the country's leading natural-foods packagers, with a market capitalization of 291.48 billion won, reorganized itself in March into a holding company. The company opted for the new structure to better manage its shareholder value and brand name, and to attract international investors, says Jay Ahn, executive director of Pulmuone's finance division.

Still, shareholder activists insist that holding companies aren't a panacea for Korea's corporate woes. They argue that the holding-company structure fails to loosen the grip of the conglomerates' founding families. For example, the Koo family is the most powerful force behind LG, owning 59% of LG Corp.

"The company structure may be more transparent now, but we still have to look out for and worry about management's behavior," says Jooyoung Kim, executive director of the Center for Good Corporate Governance, a shareholder-rights group in Seoul. The Fair Trade Commission calls the holding-company structure a "middle stage" of corporate reform in Korea.